MUMBAI, May 16 (Reuters) - India's central bank accepts thatit is fighting a losing battle in trying to stem a fall in therupee, a slide that has mirrored the slump in the oncehigh-flying emerging market.

The force of dollar demand is such that the Reserve Bank ofIndia can do little to check the fall, central bank officialssay.

"We may prop the rupee for sometime by this way or that, butit is not enough," said a senior central bank official directlyinvolved in currency management.

The RBI spent more than $20 billion in spot-marketintervention between September and March and has stepped intomarkets since, including on Tuesday. It has carried out severalother measures to try to check the fall in the currency, whichhit a record closing low on Monday of almost 54 per dollar.

Portfolio investors are fleeing -- scared away by a slowdownin economic growth and large current account and fiscaldeficits, stalled policymaking and a controversial proposal totax foreign investment.

Central bank officials acknowledge that in the absence ofgovernment policy reforms to address its deficits and encourageinvestment, the rupee will keep falling.

The central bank's attitude to the rupee is importantbecause it can provide foreign exchange dealers with anindication of how much room they have to keep selling thecurrency.

The rupee has shed 9 percent since March, the biggest fallamong major Asian currencies monitored daily by Reuters, a ndtraders are still building short positions, betting that it willfall to a record low of 56 per dollar this year.

"The rupee will fall gradually this year; it is not that itwill fall suddenly. The RBI will be propping it, but thefundamental issues have to be addressed," said the RBI official.

India's economic growth has dropped in the past four yearsto close to 7 percent from almost 10 percent. Governmentspending has raised doubts about the country's investment gradestatus and position in the BRICS grouping of Brazil, Russia,India, China and South Africa.

The RBI does not set a target level for the rupee but itintervenes in the market to ease volatility. Central bankinsiders say it c a n be reactive at best when it comes tomanaging the rupee's level.

"The RBI cannot manage the exchange rate, manage theexternal situation and liquidity at the same time. It is whatyou call the phenomenon of 'impossible trinity.' The RBI'sintervention is a temporary reprieve," a second senior officialinvolved in exchange rate policy said.

Neither official wanted to be identified because they arenot authorised to speak to the media.

Minutes of the RBI's April annual policy meeting, releasedlate on Monday, show most external members of its rate-settingcommittee suggested the central bank should allow the rupee todepreciate. India's weak economic fundamentals argue for a lowerrupee, they said.

"Our policy should be more proactive in managing currentaccount deficit (CAD) risks. In this context, some members feltthat the reliance on short-term and debt-creating flows beavoided to finance the CAD," the minutes show, reflecting theviews of the external members.

SELLING DOLLARS, SETTING RULES

Still, the central bank may be more bearish about the rupeethan many in the financial markets. A Reuters poll on Tuesdayshowed that analysts think the currency is close to a bottom.

The RBI sources said the central bank had no intention ofstepping aside even if it thinks the currency will continue tofall. Policymakers will continue to mix administrative stepswith intervention, they said.

Since September, the RBI has continuously sold dollars inthe spot and forward markets to provide support to the rupee,doing so again on Tuesday after the currency fell through thesymbolically significant 54 level, traders said.

On Friday, the RBI asked exporters to sell half the foreigncurrency in their accounts and made it easier for the market toabsorb large foreign exchange transactions by relaxing intradaytrading limits.

Shrinking foreign exchange reserves limit the central bank'sability to intervene and a hefty import bill dampens the impactof the intervention.

From September to March, the RBI sold $20.69 billion in thespot market to check the decline in the rupee, which hit anall-time low of 54.30 in December. India's foreign exchangereserve fell to $293.2 billion as of May 4 from $309.5 billion ayear earlier.

Net dollar inflows were more than $7 billion in Februarybefore falling to $387 million in March and swinging in April toa net outflow of $926.8 million.

India's balance of payments slipped into the red for thefirst time in three years i n the December quarter, and thecurrent account deficit has been swelling since April 2011 withimports rising faster than exports.

"We don't have very big foreign reserves. We can't keepsupplying dollars to the market," the first official said.